Information as a competitive advantage – Part 7, Cost Reduction

The cost cutting strategy is very popular in the business world, especially during recession or declining revenue periods. An enterprise that maintains a "cost leader" enjoys a significant competitive edge. The ability to maintain a low-cost situation is one of the prerequisites for long-term development in any extremely competitive environment. To achieve this, the business needs to develop core competencies in slim production that the Competition is not easy to copy.

The use of financial and administrative accounting systems to measure and control production costs is a common practice.

Profitability control is also enabled by accounting systems. Organizational, profit-oriented or product-level utilization of profitability ratios is a common practice based on an effective record-keeping and structured analysis of business information. Cost cost analysis contributes to product pricing strategy and profitability estimation. Use of cost accounting methods, such as activity-based cost accounting, which requires the following facts to be taken into account:

• Unit price applied to individual costumers linked to the production of a product or service (eg a specific work hours cost of EUR 35)
• All cost factors actual consumption of a unit of a product (eg 4 years of working time required to formulate a contract).

Cost Drivers refer to direct production costs for which the designation is obvious and the indirect production costs to which the allocation is made through calculations (eg estimating the location of a particular room). In addition to production costs, the facts should be monitored for marketing resource use, logistics costs and technical support costs. Cost and revenue management per client allows customers to analyze their profitability. This can be beneficial for profitable customers. Information on customers with low or negative profitability should be used to carry out root cause analysis. The use of aggregated information on production costs and revenues may not result in useful information on production activity and profitability instead of detailed information about the product, business unit, or even Customer. Many companies do not have enough information on the profitability of individual products or customer groups. On the other hand, detailed monitoring allows decision support for better product and customer management. It is very important to record integrated information such as speed and installation costs for each manufacturing process, production rates, production cycle time, resource and activity costs, waste costs. Collection of information should support the optimization and cost reduction of manufacturing processes.

Copyright 2006 – Kostis Panayotakis

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